Canada housing starts, permits drop, prices flat as market cools

By Andrea Hopkins

5 Min Read

A builder works on the the roof of a new home under construction in the Montreal suburb of Brossard August 10, 2010.Shaun Best

TORONTO (Reuters) - Canada's once-hot housing market showed signs of cooling as 2013 drew to a close, with building permits and housing starts falling and prices leveling off in the final months of the year after a strong summer and fall.

Three separate reports released on Thursday showed the same cooling trend, with weaker-than-expected readings for November's new housing price index and building permits, and December's housing starts.

Economists widely expect the Canadian real estate market to cool further in 2014 as slow economic growth puts prices out of reach for many and builders pull back to let demand catch up with a raft of new projects, mostly condos, coming online.

Building permits fell by a sharper-than-expected 6.7 percent in November, more than double the 3.0 percent pullback expected by analysts, while housing starts dropped to 189,672 units in December, shy of economists' forecasts for 190,000.

"The decline (in building permits) is in line with our expectation that residential construction will soften in the coming year in the face of affordability challenges to a pace more in line with underlying demographics," CIBC World Markets economist Peter Buchanan said in a research note.

Statistics Canada said Canada's new housing price index did not change in November, after a 0.1 percent rise in October, with prices rising in eight metropolitan areas, unchanged in eight and declining in five.

The median forecast in a Reuters survey of analysts was for a 0.1 percent rise in November from October. Year on year, prices were up 1.4 percent, the slowest since a 0.9 percent rise in February 2010.

The Canadian government, which intervened in the mortgage market several times since 2008 to cool the sector, had long expressed concerns the housing market might overheat, but it has lately said a soft landing was more likely.

The new housing price index excludes condominiums, which the authorities have said were a particular cause for concern.

Canada's housing market avoided the crash experienced in the United States five years ago due in part to more conservative lending standards and a stronger economy. While economists have long predicted an eventual correction in Canada, they are divided over whether prices will drop sharply or simply stagnate in a so-called soft landing scenario.

Prices in the closely watched Toronto-Oshawa region were up 0.1 percent on the month and a tame 1.4 percent on the year. Vancouver, to which authorities also pay attention, fell 0.2 percent on the month and 1.3 percent on the year. The oil town of Calgary was up 0.4 percent since October.

With prices stabilizing, economists expect new construction to cool further in 2014. Starts for all of 2013 slowed to 188,200 units, down sharply from 215,000 in 2012 and the lowest full-year tally since 2009, according to Robert Kavcic, senior economist at BMO Capital Markets.

"In fact, outside of that recession year, it was the slowest year for starts in more than a decade. We expect further cooling to about 180,000 units this year, which would reflect balanced overall building activity," Kavcic said in a research note.

Notably, starts for both houses and multi-units - typically condos - fell in December. Condominium construction fueled building in Canada's biggest cities, including Toronto and Vancouver, during the height of the boom, but has since slowed dramatically. Many observers fear a glut of condos coming to market in 2014 and 2015 may drive prices lower, but are divided over whether a correction would spread to the broader residential housing market.

The outsized drop in November building permits was offset slightly by an upward revision to October data to show an 8.0 percent gain in the month, according to Statistics Canada.

Residential construction intentions sank by 7.6 percent with both single- and multi-family dwellings declining, while the nonresidential sector dropped by 5.2 percent as institutional and industrial building plans decreased.

Commercial building intentions, however, were once again robust, with the value of permits hitting a record level over the past 12 months, according to Kavcic.

Additional reporting by Randall Palmer in Ottawa and Leah Schnurr in Toronto; Editing by Meredith Mazzilli